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Reproduced from the Unclassified / Declassified Holdings of the National Archives Moyernor Meyer Mr. Snead currencies Collateral sscurlty itor notes) F. H. notes); On Monday, August 3, while talking with Mr. Paddock over the telephone I advised him that lot ton was tha only Federal reserre bank which was pledgInc hills payable in foreign currencies aa collateral security for Fedeiftl reserve notes. I also stated that thlle tha Board had taken no specific action with regard to whether or not they should be ao pledged I thought ha would like to know tha practice followed fcy tha othar fadaral reserre bank*. I wanted to bring this subject to your attention last Thursday morning hat you ware so busy with othar matters that I concluded it would be better not to bother you with it at that time. On fhureday afternoon, Mr. McClelland called as and stated that the Board would like to have me talk the matter oyer informally with the officials of the Boston bank while I was there on Friday* While in Boston I was Informed by Governor Tanng aad Mr. Paddock that they had discontinued the practice promptly following ay telephone conversation with Mr. Paddock last Monday, and upon reference to the bank's balance sheet I find that the change was made on Vednesiay, August 5* I j f j I | f fhis question first aroee In 1927 at which time I discussed It with Governor Crie singer and Governor Strong. Governor Strong was quite emphatic in his position that none of the sterling bills which were then being bought through the Bank of England should be pledged as collateral security for note issues. Section sixteen of the Federal Beserve Act, in describing the collateral that nay be pledged ae security for Federal reeerve notee statee that *The collateral security thus offerred shall be notes, drafts, bills o f exchange, or acceptances acquired under the provisions of Section thirteen of this Act, or Mils of exchange Indorsed by a somber b nc of any Federal reserve district and purchased under the provisions o f Section fourteen of this let, or bankers* acceptances, purchased under the pro visions of eald Sectlun fourteen, or gold or gold certificates.11 Tou will note from this that trade hills (not bankers' acceptances) to be eleglble as collateral for Federal reserve notes oast hear a member bank endorsement. Some of the bills now being purchased abroad are trade bills which* of course, are not endorsed by member banks and consequently are not eleglble as collateral security for notes issued. If, therefore, the decision were reached to pledge any of these bills as collateral eecurity for federal reeerve notes, the trade bills would have to be eeparated from the bankers* bills and arrangements made for the bankers' hills to be held in custody for the aacount of the respective Federal reserve agent e. \ , j 1 j Reproduced from the Unclassified I Declassified Holdings of the National Archives N o . 131. O ffice Correspondence T o __ Go ve rno r Young Smead F E D E R A L R ESER VE BOARD September 2U, iggQ SuKjey.f; foreign tills bo of the Federal j&se during 1 9 2 9 * unt 2—8406 er0 X am banding you He rewi til a statement showing the amount of foreign bills bought for the Federal Reserve Bank of Hew York by months from January to August, 19^9, inclusive, This statement also shows the rate at which the bills were purchased and the exchange rate. On September 19 the System held about $l6,0U0,000 of Sterling bills, $650,000 of French bills, and $770,000 of Hungarian bills, or a total of $17,^60,000. Reproduced from the Unclassified / Declassified Holdings of the National Archives i" .^9 Ki REIGN BILLS BOUGHT 1 _ THE ACCOUNT 0? THE FEDERAL NEW YORK DURING 1929 Bou&ht by Bank of England Date Days to ran M /E BANK OS’ b (Sterling) Discount rate (per cent) Amount Ex diange rate J anuary 62 - SO $139,266.sU U-3 / 1 6 to u-9/32 $U. 8 ^ 9 3 February 70 - S3 90,611,53 U-l/U to 5-7/32 U. 8 U9 3 March SI - Sk 1 0 5 ,6 3 2 . 7 1 5 -3 / 1 6 to April 6s - 91 120,109.77 5-3/32 to May 72 - 90 11+8 ,9 6 3 . 2 8 5 June SO - July 69 - 76 August 28 - s6 93 Bought by Bank of France 71,751.to, 5-1/U 10,889,187.93 U-3/U 4. 8 U9 3 U. 8 U9 3 5-9/32 U.SU 9 3 5-1/U U. 8 U9 3 to 5-13/32 U.8U93 to 5-13/32 to 3-9/32 .03906 tc 5-7/32 to 112.7SE.07 5-9/32 5-1/U U.8U82 - U.8U93 (Fran c) J anuary *40 - 7B H3H,156.31 February 28 - 77 197,116.23 3-i/U if U83,788.81 3-i/U tt April 32 - SO 32 - 82 272,6^2.15 3-i/U to 3-5/16 11 May 28 - 82 U33.9Us.90 3-i/“+ to 3-3/S n June k k - 89 July August March 3-1/S 3-3/S to 3-1/2 ti 58 - 83 309,233*73 30it.096.20 3-3/S to 3-1/2 ti 66 - 8^ 296,399.^3 3-3/S to 3-1/2 •1 Bought by Bank of France from the Magyar Nemzetti Bank of Budapest July 22 - August 52 S k - 80 FEDERAL RESIEVE BOARD DIVISION OF BANK OPERATIONS SEPTEMBER 2 k , 1929. 1,012,287.^2 7-1/2 to 207,393.13 7-1/2 to 8 8 (Pengo) .17U9 II Reproduced from the Unclassified I Declassified Holdings of the National Archives / I J '/iJ , raam Ms. .. Office Correspd ’ c t*2 reDERALREsaiVE BOARD VT Hr. M d y 33 B. h- i I discussed, with Qovernor Grissinger some few days ago the advisability t of usin& sterling Mila, which the ays tea ia "buying through tho lank of England! aa collateral security for federal reserve notes. antTfovernor Strong, 5ame Into^feiie room at thFt'S^* t o s "very emphatic in hi a yosition that none of them should he pledged aa collateral security for note iisuas, Governor Criasinger asked that I submit a memorandum covering the subject. Trade hills bought hy the lank of England for the account of the Federal kreserve "banks, not being endorsed by member banka, are not under the law Ieligible aa collateral aecurity for Federal reaerve feafces, Bankera acceptances so acquired, however, are apparently eligible aa collateral security, and tha question as to whether or not they should be so used would seem to be one that ghotild be passed upon by the Board. We have prepared a suggested letter, a e#|0F of itoich ia attached hereto, to be used in case the Board should decide that bills payable in foreign currencies and held abroad should not be used as collateral for note issues. WBK Repioduced from the Unclassified I Declassified Holdings of the National Archives ./> FEDERAL RESERVE BOARD WASHINGTON ADDRESS O FFIC IAL CORRESPONDENCE TO TH E FEDERAL RESERVE BOARD August 1, 1927. iJEGTs Paper pledged as collateral security for Federal reserve notes. Dear Sir: Section l \ o f the Federal Reserve Act provides that paper acquired \ v the Federal reserve banks in the open market, in ordei\fco be eligible as collateral security for Federal reserve no^tes, must be in the form of bankers * acceptances or of bills\of exchange endorsed by member banks Some of the sterling b i ^ vtfiich are being purchased for the Federal Reserve Bank of mpr York by the Bank of England, and in which a participation Im allotted to each other Federal reserve bank, are bankers’Acceptances and thus eligible as collateral security for Fed* ral reserve note issues, while trade bills do not bear the others are trade bills. As endorsement of a member bark,%they are not eligible under the Act as collateral securi tyilfor Federal reserve notes. Inasmuch, however, as all of thfese bills are payable in a foreign currency and are in the\hysical possession of a correspondent in a foreign country, the Board has ruled that none of them should be pled^k with Federal reserve agents as collateral security for %itstanding Federal reserve notes. fery truly yoirs,^ DRAFT OF SUGGESTED LETTER TO ALL F.R.AGBHTS Reproduced from the Unclassified I Declassified Holdings of the National Archives Form Nov 131. F E D E R A L R ESER VE BOARD O ffice Correspc To Mr ._ Eddy Datb a Hr. Smead 3 3 3 <^ For the information of the Board I am giving below a summary table showing the amounts of sterling bills purchased by the Federal Reserve banks since September 18, 1924, the date on which, according to our records the first bills payable in a foreign currency were purchased by a Federal reserve bank. The bills purchased by the Federal Reserve Bank of New York on Sept ember 18 from the Bank of England represent: an investment of a portion of the balance carried with the Bank of England for a number of years* These bills had a maturity ranging from 84 to 90 day® and as they matured in December other bills were purchased to take their place* The bills pur chased in March 1925 were also to replace maturing bills purchased in December® The sterling bills purchased by the Boston and Cleveland banks and those purchased from the International Acceptance Bank by the Federal Reserve Bank of New York were all taken on an exchange secured basis. The. exchange at which sterling was converted in the case of the bills bought by Cleveland was several points below actual sterling quotations on the dates of purchase while in the case of the Boaton and New York purchases conversion was apparently made at the exchange rate of the day. The Cleve land bank stated that the Bank from which the bills were purchased has con tracted in writing to ^ake them up on the maturity date at the same rate for sterling at which they were sold to the Reserve bank. The difference in rates on prime bills in the London market and in this country is clearly brought out by the fact that bills purchased for the Federal Reserve Batik: of New York by the Bank of England on March 11 were taken on a basis to yield 4-13/32 per cent, whereas the bills bought on March 7 and 13 by the Federal Reserve Bank of Cleveland from the Central Bank, Savings and Trust Company were taken on a basis to yield 3-l/4 per cent* PORCHASES OF STEELING BILLS BY FEDERAL RESERVE BANKS Amount Date Pounds Dollars Rate of ex change Discount Maturity rate (days) (per cent} Purchased from Federal Reserve Bank of New York 1924 Sept. 18 25 29 Dec. 10 n 12 13 17 18 50f633:4s5 100,65480:11 402,085*12j6 7,946;6:7 3,009jll:7 6,182:5a 4,486:8:4 13,421:14:0 15,989:0:18 226,689#99 $4.4771 448,917*04 4.46 3.,793,301,86 4.46 37,292.92 4,6931 14,129.52 4*6949 28,964.48 4.6851 21,058,34 4.6938 62,953,14 4.6904 75,082,90 4.6959 3-11/16 2*-*l/4 2-l/4 3-9/16 3-9/16 3**9/l6 3-5/8 3-11/16 3-11/16 84 to 90 Bank of England 75 to 90 International Ac, Bk M 6 8 to 90 87 to 90 Bank of Inglaad t* 82 to 8 6 tt 85 t t 84 t i 84 tt 83 Reproduced from the Unclassified I Declassified Holdings of the National Archives Form N " , 131. FEDERAL RESERVE BOARD Office Correspondence Date To _ Subject: From. - 2 - PURCHASES OF STIRLING BILLS 3? F3ICRAL R S 3 H B B/UX3 Amount Date Pounds Dollars Rate of ex change Discount Maturity rate (days} (per cent} Purchased from Federal Reserve Bank of Hew York (Cont*d) 1925 Mar* 4 9 10 11 18 2,822*9:5 15,532:18:11 3,494:19:1 19,790:1:3 9,952:3:11 13,440*61 74,017,60 16,663.59 94,430 *26 47,529.70 4.762 4.7652 4.7679 4.7716 4.7758 4-7/16 4-7/16 4-3/8 4-13/32 4-11/32 84 to 88 90 to 91 85 91 93 Bank of England 64 to 79 First National Bk. »» tt ft Federal Reserve Bank of Boston 1924 Dec. 9 100,755:2:0 474,304.63 4.7075 3 Federal Reserve 3ank of Cleveland 1924 Oct. 31 Nov. 8 24 28 Dec. 17 30 20,218:14:3 22,142:6:9 20,501:5:7 25,218:3:5 25,000:0:0 25,838:0:2 90,984.20 114,360 <*57 92,255.79 113,481.77 115,000.00 118,854,85 4.50 4.50 4.50 4.50 4.60 4.60 2-1/4 2-1/4 . 2-1/4 2-1/4 2- 7/8 •3-1/8 25,515:18:8 25,385:6:8 25,631:12:7 50,637:4:5 25,456:0:6 25,095:0:0 121,334.88 119,311.07 120,468.66 238,023.13 119,643.31 117,946.50 4.70 4.70 4.70 4.70 4.70 4.70 3-1/8 3-1/8 3-1/8 3-1/8 3-1/4 3-1/4 54 to 56 75 to 77 74 to 80 75 78 65 to 76 1925 Jan. 15 Feb. 6 13 25 Mar. 7 13 58 75 75 69 90 78 87 79 73 73 to 76 to to to to 0 Central Bk.Svgs .& ft tt tt tt tt tt tt tt ft « tt tt t» n tt tt ft tt ft » Reproduced from the Unclassified I Declassified Holdings of the National Archives \ February 13, 1925. Federal Reserve Board, Washington, D . C . Attention Mr. E. L. Smead, Chief Division of Bank Operations Gentlemen: In reply to your letter of February 12, it will be satisfactory to us for you to amend our previously published figures to include in "Bills Bought in Open Market,n Sterling Bills Purchased thru the Bank of England of $245,000 shown on September 24 and October 1 in “All Other Earning Assets.” Any figures published by us hereafter will be in accordance with this revision. Very truly yours, / , J j ,- ' 1 ) K y ' V " / • M* Rice, Manager, Accounting Department, JMR Reproduced from the Unclassified I Declassified Holdings of the National Archives / 3 3 3 . V'-/ Fsbru&ry 12* 19£6* 7 > rn t Siri You Will doubtla#• rooall that whoa yxror baa* poroi»s®& sterling bill* o h 3®pt«tb«r 18, 1924, tbor® v w son* q«®atioa a* to ho* th«y b® r®poart®d la tb® wooitly p r M i 6tat«rs®iita. It was finally dooidad that th®y should b® in®lud®d with bills boa#* lm opsa n^rlnt and this m » don® b®£lialng with th* stat«n®nt for Ootobor 3. la th® atataa®nt® for S®pt«»b®r £4 aod Ootob®r % *&••# bills w r u shows m *k%% $th«r oarning but It ms not ibon^st necessary -.hon th» Ootobor $ s^^tosaoat ws* IssGOd to aak® any **?iBlom Of th® flgoroa already pabltsh®&# Im preparing our mmmmX roport, hororor, 'sro f l M it &*o®£aaxy eithar to m & ® th® oban#®, t*-##* to i&er®**® bills bought in opon mutest for a«yl«rtMr 24 aaA Ootob«r 1 by #2*6,000, or ®ls« to show that m tbo toiot aontlon®* snail bills mr® Isoini*! with all other mm£m &i»®t® m i th®r®aft®r with bills boot£fet 1# t*n:14 pr®f»x not to ta*» tb® lattor o « a m t ***& ** w® nndarstaad fitm Xr# fr®®lan& of ytmr off!#® that th®r® will b® m ob j®ctl®n ®j* it*® pmrt of ywar b&u& to sa*&£iag tb* w®®*ly ftato^ont flgar®sf w® shall 4® this iaat®ad, Tour bank’® holding® of bills bowght In ®§*a warkat m shown Im th® wooitly praos stat®m®ntc for S«pt®nfc®r 24 and Octobor 1 will th®r®for® b® fetaamsti by ^ 6 f000t with m @£f®®ttli*f oltftoigft la All oth®r ®aralng assota. f® sh&ll appreol&t® four advlo® in oas® this action 1® mot ®ntir®ly •utlsfactory to you* bank* V®ry tirnly yofcjrs* tS« L# SlMMkd^ dhlOfif Division of Bank Operations. Reproduced from the Unclassified I Declassified Holdings of the National Archives Fe d e r a l ' R e s ^ r v e B a n k of Cleveland January 3 0 , 1 9 2 5 . SUBJECT: Schedules reporting the purchase of sterling bills Mr. E. L. Smead, Chief, Division of Bank Operations, Federal Reserve Board, Washington, D. C. Dear Mr. Smead: The sterling bills scheduled on schedules numbers 1 9 3 , 1 9 8 , 2 1 6 and 2 2 6 , reporting purchases on November 24 and 28th and December 1 7 and J O t h , aggregating $^39#592.4l, were all purchased exchange secured. The bank from whom we purchased them have contracted in writing to take up the bills on the maturity date at the same rate for sterling at which they were purchased by us. Bills aggregating $121,334.88 purchased on January 1 5 , 1924 and shown on schedule number 1 6, were purchased under the same condition. We shall be very glad in future transactions to state on our schedules that the bills are bought exchange secured, as it is our policy to buy them only under that condition. ERF. ZCD. Reproduced from the Unclassified I Declassified Holdings of the National Archives January 29, 1926 SUBJSOfi 3 3 SWhedales reporting the purchase of sterling M i l s . Dear 3ir* We have your schedules numbered 19$, 19», 216 and ZZ6 reporting purchases on loveaber M and 28 and December 17 aad 30, of priae sterling bills segregating #439,592.il. These schednlee do not stats whether thess hills were bought exchange seoored or whether in the event that the rate of sxotpttge on the due date Is not identical with the rate at *hloh the bills wore parchaeed, the profit ©r loss on exchange is to be absorb* sd by the Federal reeerre bank. It will be appreciated If you will kindly ad vise the Board la this rsgard and I n the tutor* hare the schodulee themselves show whether or not the bills are bought exchange-secured. Very truly yowrs. 1« L. Smead, Chief, Division of Bank Operations Hr. 1* R. ?ancher, Governor, Federal Reserve Bank, Cleveland, Ohio. Reproduced from the Unclassified I Declassified Holdings of the National Archives F o rm N o . j. U . O ffice Correspondence F E D E R A L R ESER VE BOARD Qosmitteg on Discount & Open Larfcet Policy (Messrs* Miller, Platt cc Ganningham) Ffom, ^?* ***?-_____________ // silt? .ate Beceniber 8 , 1924* Subject: — ,y / M By direction of the Governor, there is referred to the Commfttee on Discount and Open Baifcet Policy, for report at the meeting of the Board on Thursday, the attached memorandum with regard to action of the recent Federal Heserve Agents* Conference on the subject of investments by Federal reserve banks m foreign hills# She Board on lovamber 32th approved a recoiamendation of the Governors* Conference, contained in the rerport of its Open Marfcet Committee - "'JJhat action on the recommendation of the Advisory Council relative to tl^jfjj^ehase of foreign hills he deferred -until such time as we m ^ be in a position to know more about the development of conditions relating to foreign exchanges; and that the System make no purchases of such bills until that time.* Reproduced from the Unclassified I Declassified Holdings of the National Archives F o rm N o *31. Office Correspondence T o :_____ Federal- Btagggft- Board*________ FEDERAL RESERVE BOARD Date December 4, 1924* _________ 3 3 3 , Subject: 9--1 From____ The following topic was considered by the recant Federal Reserve Agents* Conferencei "Has the time come for federal reserve banks to consider investing some of their funds in foreign bills?* was She following report of a Qompnittee appointed to consider this topio unanimously adopted; "The committee has been advised by Jay that he dismissed , the resolution of the Federal Advisory Council with the Governor of the Bank of England a fortnight ago, and learned from him that in his opinion it would not be practicable for the Federal reserve banks to make any really substantial investment in the London market, as under present conditions it would not be practicable to secure a large volume of bills* fhe committee feels that when the System goes into foreign markets to invest in bills it should do so for some constructive purpose other than merely to secure earnings# Should Bngland and some of the continental countries like Holland and Switzerland decide in due course to resume gold payments there will doubtless be an opportunity for Federal reserve banks to extend them.a considerable volume of credit, either here or abroad, in * manner which would be very helpful not only to them, but to the stabilization of exchange generally with all of the attendant advantages to American trade and commerce, It appears to the committeft that if Federal reserve banks should undertake, contrary to the credit policies being purpuftd in England and other European countries to enter their markets at the present time, the result might hinder rsther than help their return to a gold basis,* t ' t http://fraser.stlouisfed.org/ n Federal Reserve Bank of St. Louis V * Reproduced from the Unclassified I Declassified Holdings of the National Archives V Joint Conference discussion of the following topic: nHas the time come for Federal reserve banks to consider investing some of their ftmds in foreign bills. (Resolution adopted by the Federal Advisory Council, September 25, 1924, copy enclosed.) Reproduced from the Unclassified I Declassified Holdings of the National Archives I : ! * j | Governor Criasingers Then we will take up !fc>. 7f Mr, Perrin.. I ! 7. Has the time come for Federal reserve banks to consider investing some of their funds in foreign bills* (Resolution adopted by the Federal Advisory Council, September 25t 1924, copy enclosed*) Mr. ^©rrint The committee has been advised by Mr Reproduced from the Unclassified I Declassified Holdings of the National Archives ix_ \ I 56 Jay that he discussed the resolution of the Federal Governor of the Advisory Council with the/Bank of England a fortnight ago, and learned from him that in his opinion It would not be practicable for the Federal reserve banks to make any real, substantial investment in the London market, as (. \ under present conditions it would not be practicable to 4 secure a large volume of bills. The committee feels that when the system goes into foreign markets to invest In bills it should do so for some constructive purpose, other than merely to procure earnings. Ifi England and some of the Continental countries, like Holland and Switzerland, decide in due course to resume gold payments there will doubtless be an opportunity for the Federal reserve banks to extent them a considerable volume of credit, either here or abroad, and in a manner which would be very help ful not only to them, but to the stabilization of the situation generally, with all of the attendant advantages to American trade and commerce. It appears to the com mittee that if Federal reserve tanks should undertake, contrary to the credit policy pursued in England and other European countries, to enter their markets at the present time, the result might hinder rather than help a return to | ( Unclassified / Declassified Holdings of the National Archives 57 a gold basis. Governor Orissingers What have the Governors to say about this topic? Governor Strongs c ubstantlally the same thing. It depends on who speaks first, I see. I do not want any member of the Board to think that there has been a conspir acy between the Governors and the Chairmen at all. We have not collaborated. Mr. Perrins We had lunch together, that’s all. Governor Strongs Our action was this: That action on the recommendation of the Advisory Council relative to the purchase of for ign bills should not be taken until we were in a position to know more about existing conditions relative to foreign exchanges, and that the System make no purchase of such bills until that time. tle shorter, but to the same point. It is a lit Reproduced from the Unclassified I Declassified Holdings of the National Archives iV ^ *? d RESOLUTIONS ADOPTED B Y THE FED ER A L ADVISORY COUNCIL SEPTEM BER 25, 1924. RESOLUTION NO. 1: W h e r e a s , a further easing o f money rates at this time might render it extremely difficult to w ard off a period of acute inflation with its subsequent evil consequences with which the country is only too well fam iliar, and W h e r e a s , forced investments of Federal Reserve Banks in our market and con tinued substantial importations of gold into the United States are factors that might tend to enhance the plethora of money already existing, R esolved , that this Council recommend to the Federal Reserve Board to con sider the question whether the time has come for Federal Reserve Banks to exercise their power to invest some of their funds in foreign bills with approved American banking indorsements and payable Hy^anB”repaySn5Ie'to'”F&d5ral Reserve Banks in dollars. The Council believes that observing these safeguards and by properly scatter ing its purchases the Federal Reserve System can safely invest substantial amounts abroad, without any risk of loss on account of exchange or otherwise, and in doing so ward off to that extent the inflow of gold, incidentally assisting the foreign countries involved in their efforts to stabilize their exchanges and to bring them back to definite gold relations. RESOLUTION NO. 2 : The Council has learned that the Secretary of the Treasury is about to call in for redemption on February 1, 1925, the $118,489,900-4% Loan of 1925, and desires to record its entire approval of the policy involved in this step. Reproduced from the Unclassified / Declassified Holdings of the National Archives Fe d e r a l o f serve Ba n k \ N ew Yo r k November 2Q, 1924. My dear Governor: The enclosed reply to Vice Governor Platt's inquiry in re gard to the recommendation of the Federal Advisory Council was dictated on Election Day, but has not been sent before this date because of my desire to complete inquiries then under way as to the technique of the conduct of dealings in future exchange. This has now been completed, and I feel satisfied to send the report, explaining, however, that were any important transaction imminent, I would have preferred to rearrange the letter in a little more logical form, so that this rather technical subject would be reported upon in a less technical way. Dr. Stewart has expressed a good deal of interest in this matter, and I therefore ask that the letter be shown to him. Very truly yours, BENJ. STRO] Governor. Honorable D. R. Crissinger, Governor, Federal Reserve Board, Washington, D. C. Enc. Reproduced from the Unclassified I Declassified Holdings of the National Archives [ Reproduced from the Unclassified / Declassified Holdings of the National Archives Fe d e r a l R e s e r v e B a n k Mr I V V o f C levelan d v, V ^ \p' 3 a 3 , November 8, 1924. Federal Reserve Board, Washington, D. C. Attention: Mr. E. L. Smeadr Chief, Division of Bank Operations. Gentlemen: I thank you for -QfMqv emb.gr 4 in answer to my letter of October 3 1 in connection with sterling bills purchased by us on October 31* I am glad to have your instructions regarding the method of reporting these transactions and will be governed accordingly. I failed to state in my letter of October 31 that a. schedule of the complete transaction was being forwarded to the Board in the usual manner. The bills in question were purchased from the Central National Bank Savings and Trust Company of Cleveland, and I might add that we are making another purchase today from the same bank of about 20,000 pounds under the same conditions. If you will refer to our schedule of October 31 y°u will find the transaction of that date fully reported. With best regards, I am, Very truly yours, V ~ f Reproduced from the Unclassified I Declassified Holdings of the National Archives 3 3 3, y ~ / Federal R e s e r v e B a n k \ o f N e w Yo r k v* ^ovamber 5, 1924. Federal Reserve Board, Washington, D. 0. Dear Sirs5 Replying to Vice Governor Platt's letter of October 25, the following is a statement of personal views regarding the resolution passed by the Itederal Advisory Council at its meeting on September 25, 1924, recommending that the Federal Reserve Board consider investing funds in foreign bills. Our directors prefer to defer an expression of opinion pending further consideration. My associates inform me that advocates of the plan believe, (a) that it will furnish investments for Federal reserve banks without the inflationary effects whioh it is olaimad result from domestic investment; (b) that it will facilitate the creation of a market for sterling bills in Bew York, and (oj that it will assist in the stabilization of sterling exchange and promote return to gold payment. Before discussing the recommendation and arguments, it should be understood what lias been the usual course of business in handling paper of the character de scribed, and just how the investment recommended by the Federal Advisory Council would be made by Federal reserve banka, so that they might be reasonably insured against risk of loss either on the paper itself or by fluctuation in exchange. Prior to the war, (but to a less extent since the dollar acceptance has been introduced into this market) exports from the United Btates of certain commodities* such as cotton, etc., were largely financed by drawing sixty and ninety day bills on foreign acceptors, with documents attached. These bills were negotiated through, various channels at the points of origin, finally reached Hew York banking institu tions which had banking connections abroad, and by those banks were remitted to their Reproduced from the Unclassified / Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF NEW F ed eral ReSCT ,r d , ll/ 5 / 2 4 . Washington, ])• foreign correspondents who presented the bills for acceptance and then disposed of them in accordance with the instructions of the New York banks by which they were remitted. Much the same course was pursued with various banking centers on the con tinent, as with London. cotton, During a.large export movement of such commodities as the volume of bills so handled was very heavy, in fact too great at times for even large American banks to carry them all to maturity in portfolio as invest ments, and the customary practice was for the Hew York banks to sell the bills in London and draw demand exchange against the proceeds, the drawings often being made simultaneously with the remittance of tha documentary bill, so that the bills re mitted and the bills drawn arrived in London frequently by the same steamer and the New York banks got immediate reimbursement for the funds invested in the bills by the sale of exchange in New York. When the money rates in London were higher than in Hew York, it proved profitable for the New York banks to carry some portion of these bills in portfolio in London, but when money rates in New York were higher then in London, an immediate sale of the bills in the London market and siraultaneous drawing against the proceeds enabled the New York banks to employ the funds in New York at the more profitable rates. During all the years of the writer’s experience prior to the war, when these bills were passing through New York banks in very large volume, there was no difficulty whatever in their negotiation so long as the responsibility of the drawers, endorsers and prospective acceptors was well known to the New York banks aad the documents were in order. The natural maiket for the discounting of the bills was, of course, at the place where the bills were made payable by the drawer, (that is, London) the discount naturally taking place in the currency of the countiy where the bills were payable. With tha outbreak of the war, interruptions of mails, and the suspension of gold payment, the handling of these bills became impeded because of the uncertainty Reproduced from the Unclassified I Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF NEW .... 3 * ..... F e d e ra l B ess: ^ o a rd , 1 1 /5 /2 4 . Ashing ton, 2)* 0* and insecurity of transit, tha difficulty of drawing against the proceeds, and the possibility of heavy losses in exchange in cases where the purchase and resale of the bills and tha corresponding sale of demand exchange were not simultaneous. By gradual stages of evolution, dealing in so-called "forward** exchange has developed throughout the world, so t&at buyers of bills maturing in th.e future are now able to make sales of the resulting exchange to be delivered and paid for at maturity date. !2his busi ness has gone through a variety of changes and assumed a variety of forms, but at the present time, even with mail facilities restored and the facilities of the discount markets about as adequate as they were before the war, it is still necessary, because of Ahe exchange risks, for all dealers in exchange either to “balance** their books, that is to say, to discount and sell against every thing they buy, and buy against everything they sell simultaneously, or else to cover future maturities by future sales. Shis development of the "forward** exchange market, while not entirely new since the war, has, nevertheless, progressed until it is now conducted in a fairly orderly way on very close margin, and has become an important element in the conduct of the foreign exchange business. It should, however, be understood that the capacity of dealers in “forward^ contracts to make these contracts, is limited by three factors. Bie first is the actual amount of true exchange which is produced by actual purchases and sales of goods for future payment, that is to say, those who sell goods abroad to be paid for at a future date, have “forward** exchange to sell in the market, where as those who buy goods abroad for future delivery and payment, are in the market to buy “future** contracts, both seller and buyer undertaking this foi the purpose of in suring against exchange losses incidental to trade in goods* ©iis is the true supply or true demand for ‘•futures,** arising out of the business of those who conduct actual trade in goods and who supply the market with the exchange or demand for exchange for future delivery* A second source of supply of "futures” is that furnished by the brokers, dealers and speculators who are constantly trading in contracts for exchange Reproduced from the Unclassified I Declassified Holdings of the National Archives FED ER AL R ESERVE BANK O F NEW ...Q........ i’SdOral tlOSQrV© IX/ 5 J^A: Washington, 1). 0. and who may themselves be willing at times to assume speculative future commitments "beyond the actual amount which they immediately cover through purchases or sales, ^ JMriL source of suxoply is actual accumulated balances in bank, against which sales of "futures’* are made, usually by banks and bankers. -lowever, in a broad way, it may be said that the supply of future contracts for exchange is limited by the amount of transactions in goods for future payment, by existing bank balances, and. by the extent to which those who indulge in speculative operations in exchange are willing to enter into contracts without having exchange in hand or the payment in hand for cover. iilhe process, therefore, by which Federal reserve banks would purchase sterling bills in the American market would be to buy them at the rate of exchange on the day of purchase from American dealers in long sterling .bills, and simultane ously with this purchase make an actual sale of the "future51 exchange arising at the maturity of the bill, to some responsible purchaser whose contract to take it could be relied upon as absolutely good. f I!hese would be unaccepted bills with documents attached and would have to be immediately remitted to London for acceptance and there held by our correspondent for collection at maturity, in London is discussed later.) (A possible purchase of bills It will be observed that the risks involved in this business are, first, the ordinary commercial banking risk of the goodness of the paper purchased, with dependence upon the documents, as well as the acceptor, endorser and drawer of the bill, and second, the risk involved in the contract for the delivery of exchange to the buyer of the ‘’future** which is limited to the pos sible exchange depre ciation. At the present time, and probably usually, it will be found that the difference between the rate of exchange at which long bills can be purchased and the rate o f exchange realized for the "future” delivery is so great that it will absorb the entire difference between the discount#rates prevailing in the London market on paper of this character and the rates commanded by dollar acceptance in Hew Iork# Reproduced from the Unclassified I Declassified Holdings of the National Archives FED ER A L R ESERVE BA N K O F N EW ’ .5.. ’ ?Q&9ral HeSQTVi. Washington, D. u. d , ll/ 5 / Z 4 i Purchases made through Mow York institutions would, necessarily, be subject either to a commission charge or to soma slight advance in the rate of exchange at which the transaction was conducted so as to insure a profit to the Hew York bank over what would be realized by the institution itself remitting the bills to London and selling forward exchange, or discounting them and selling demand. 2his is discussed in a letter addressed to Governor Orissinger by our Mr* Case on September 30 last, and I shall not repeat the figures therein stated. advantage It will be observed that there is no over rates at which our funds can be employed in this market when the dif ference in the exchange rate is considered, and especially when commissions are de** ducted by those with whom the business is transacted. Hot only is there some addi tional risk in the purchase of these bills as against domestic bills, but the amount of clerical work and esjpense involved in the accounting, distribution, collection and settlement of the bills is greater than any other type of investment which we could make. 3sferring to the arguments mentioned, i.e., (a) As to the point that these purchases will have less inflationary tend than the purchase of domestic bills or Government securities, there is in fact no difference whatever, in investment in foreign bills places an equivalent amount of B’ederal reserve funds in the market in the hands of member banks, which serves as reserve just as any other Federal reserve funds serve as reserve for the members, and the same structure of credit can be erected upon the credit balance so created as will arise from any other credit balance at the Reserve bank. ilhe effect is illustrated by what transpired in our purchase of bills from the International Acceptance xians. Bbr £100,000 of bills, we issued to the International Acceptance Bank our check for ^ 5 0 , 0 0 0 in round figures, i’hese are Federal reserve funds and count as reserve to the member bank which gets them. u3ie International Acceptance Bank deposits this check with its depositary bank, say, the Hanover National, and against the balance draws its check to the exchange dealer from whom it buys the £100,000 sterling with which to pay for the Reproduced from the Unclassified I Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF NEW \ .............. F e d e ra l RQSQT\ 1 1 / & /% 4 : . Washington, B* 0* bills in London. (2!h6 £100,000 p a r e n t in London is probably pads by a cable transfer, and is simply a transfer of a balance in an English bank from the credit of one party to another,} Ehe exchange dealer who receives the check of the Inter national Acceptance Bank in turn deposits it in his bank, which thereby gets the additional reserve at the Heserve bank of |&5Q,GGQ, ind from then on the process of lending and re lending this amount of Federal reserve funds goes through the usual course and creates the usual structure of bank loans and bank deposits, resulting either from gold imports or from any expansion in the earning assets of Reserve banks* It effects no transfer of ^ m o n e t o London, but simply effects a transfer of a sterl ing balance in London from one depositor to another. It does withdraw £100,000 of bills fran the London discount market temporarily and creates a future demand for dollars in London vftich must be satisfied v&tenever the account is ultimately liquidated. (b) The creation of a market for paper of this character in Hew York im presses the writer as mythical and liable to be misleading as to what is sought to be accomplished* f Bie real market for sterling bills must always be London, «Just as the real market for dollar bills must be in 3Sew York* She purchase of sterling bills by Federal reserve banks will neither improve the ‘•market* for those bills, nor will it provide a true discounting place for them, but will simply substitute the Federal reserve banks temporarily as holders of the bills instead of the imerican banks which, in the usual course, must remit them promptly to London for acceptance and to be carried as investments or to be discounted through the London banking machinery. If we buy them prior to acceptance, we would then be obliged to send them to London, In my experience in dealing with sterling bills, vjhich would go back for ten or fifteen years x^rior to the commencement of the war, there never was any diffi culty about marketing bills in lew Yorlc for remittance to London in the usual course. Almost our entire export cotton movement was financed prior to the war on long bills and no difficulty was experienced in the movement of those M i l s machinery in the south and in lew York, through the banking Bie same is true of other types of long Reproduced from the Unclassified I Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF NEW ...... F e d e ra l B©S6. ja r d , ll/ & / 24. l&shington, B. 0. “bills which are drawn against actual exports and which have that canniercial character which qualifies them for discount at the Bank, of England in the case of sterling bills or at the Federal Beserve Bank of ifew York in toe case of dollar bills. Our purchase would simply be a substitution of one holder for another, pending remittance to London for acceptance collection or discount* iTo “market1* is needed here. As to (c), that the holding of a large investment account of this character would be an aid, toward the stabilization of exchange and a return to the gold standard, we think possibly the effect of such investments in an;/ volume which would be of im portance to that end, might prove to be a menace to the stabilization of exchange and toe return to gold payment rattier than an assistance. 1x3 the first place, our in vestigations of this market indicate that the amount which could be purchased with satisfactory "forward*' exchange sales contracts, in other words, with the obligations of institutions in which we have confidence, 5s limited. At che outset, we believe it might be limited to not over $50,000,000, if that much. It must also be borne in e mind that the names which we would, get on these contracts are very largely names of institutions which already appear on many dollar bills which we buy, and it would then be a multiplication of che credit risk. Vfe would not be willing to accex>t forward contracts from firms and individuals, and the number of institutions whose names we could get on these contracts is probably com|>aratively few. If, as we believe, the number of those making commitments for future |>urchases of exchange is rather limited, and if we undertake to cover purchases of sterling bills by sales of futures to a limited number of the strongest institutions doing this business and maintain the volume of the account at a large amount, say $100,000,000, indefinitely, it would mean that those institutions, because of the size of these commitments, would thereafter be limited in the amount of this business which they could undertake. It might effect a considerable impairment of the capacity of the market generally to undertake dealings for future delivery. Our sales of exchange for future delivery would be Reproduced from the Unclassified I Declassified Holdings of the National Archives FED ER AL RESERVE BANK O F NEW ...... ............. ? Q < te V a l B&SQ1 Washington, IV & 9 11/5/24 ^» conducted with a comparatively small number of institutions and if the account was a large account the amount of their obligation to us in each case would be quite heavy# Should the time come when these institutions, for one or another reason, became unwill ing to continue to make purchases of futures to replace those which matured, we might be forced to let the bills run off or continue the operation at constantly declining rates for sterling. She tendency would likely be to widen the difference between the demand rate for sterling and the rate at which futures could be sold. It is not diffi cult to conceive of a situation where the continuance of an investment account of this character would be quite beyond our control, and where, in fact, it might be necessary to reduce it or close it out at a time which would embarrass the stabilization of the exchange market and the return to gold payment. Even though we were able to secure a large volume, 50 or 100 million dollars or more, the effect of such purchases would be to create a large unliquidated open account hanging over the sterling market, and were conditions to change, - for example, were we to have heavy discounting by our members or a large export gold movement, we might then be forced to liquidate the account at an unpropitious time and Jeopardize whatever progress had been made abroad toward stabilization and gold payment by other and more comprehensive methods* She above remarks apply simply to local purchases of long sterling bills of American origin bearing American names. Such purchases would, of course, necessi tate the remittance of bills to London, where they would be held for our account until maturity. 'jJhe small transaction already effected, however, was in fact a purchase of bills of Snglish origin, the bills themselves being actually iaken out of the London market and shipped to this country. The comments above in regard to purchases of bills of American origin should be modified as to this form of purchase in the following respects: Reproduced from the Unclassified I Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF NEW ... Federal iteservfc ^.**d, washington, L . 0. 11/5/24. xhe process which we would employ in buying bills in London of British, origin would be somewhat different from that which would be necessary in buying them in lew xork. We would probably make an arrangement with the Bank of imgland by which they would make regular'purchases in London, and it wouId be necessary to nake the sales of futures there, payable, of course, in dollars in Mew xork. in fact, a sale of dollars would have to be effected first in London by drafts on Sew iork so as to cre ate the necessary sterling balance with which to buy the bills, because the sale of the dollars to create the sterling balance, the sale of the fixture cover, and the pur chase of the bills, nust be substantially sinultaneous transactions in an exchange market which fluctuates as rapidly as the market does just now. otherwise, the loss of time in cable transfers, etc., would subject the bank to a risk of exchange loss which might indeed eat up all of the discount profit, i at one time discussed some such arrangement with u-ovemor Morman and he expressed a great deal of doubt -whether more than a very limited volume of bills could be acquired in London, the limitation in the volume of bills and in the amount of good ♦‘futures'1 which could be obtained being such as to restrict the volume of purchases -which could be made. it i3 undoubtedly true that at a time when discount rates are higher in London than in lew iork, the tendency is fbr American buyers of bills to carry them in portfolio in London so as to realize the higher rate of discount return, insuring themselves, of course, by selling 11forward11 exchange as above described, it migjht, therefore, be argued that discount facilities for .American banks siaould be developed here for their protection in case their portfolios become unduly large in .London, we doubt -whether the demand for such protection is of any considerable proportions, if it exists at all. ohe jjondon market has always, even during the war, been ample. Most of the large .american banks are doubtless glad to take advantage of the higher return for their funds so employed than at present can be realized on similar employ ment in jSiew iork. London bills, when .wew iork rates are hi^ier, they can promptly melt their un the other hand, however, consideration should be given to what Reproduced from the Unclassified I Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF NEW U-,.... jj'e d e r a l Xl@S6I*Ve ** 11^5/24. Washington, u. 0. effect such a policy conducted in a large way, would have upon the respective money markets, and especially upon the prospects of a return to the gold standard, uiie aank of Migland is at present pursuing a policy of maintaining a somewhat higher money mar ket in London than prevails in new xorte. ihe withdrawal of a large amount of bills by the federal reserve banks from the London discount m r k e t would have a tendency to create easier money there, that is to say, to reduce the demand for loans upon bills at the joint stock banks by bill dealers, thereby releasing funds for other employment, whereas at the same time the equivalent in dollars would be injected into this market the same as in the case of the purchase of domestic bills. it is impossible to forecast absolutely that large transactions of this sort would in fact have any considerable effect upon the money narket in .London, but if it had any effect, it would be in the direction of creating easier money in that mar ket and a somewhat similar effect in this market. The return of sterling to par, however, will best be facilitated by high rates in juondon a n d lower rates here. we do not believe that 3ueh a program should be undertaken without a very full understanding in London, especially having in mind the major object of an ulti mate return to the gold standard, if the time comes when the Federal reserve banks should make investments in juondon for the purpose of facilitating the return to gold payment, we think that such purchases should be made actually in .London through our own connections there, and with every possible safeguard against loss either on the bills or on the rate of exchange. xhe writer believes that one of the greatest services that can now be performed for the business interests of this country and the rest of the world would be to secure the restoration to gold payment by the principal nations of iurope, and especially by u-reat Britain, ihis will not be accomplished by the federal reserve banks appearing as volunteers in an investment account 'of this character without any arrangement to insure that the result of the effort will in fact be a return to gold payment by ureat Britain. Reproduced from the Unclassified I Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF NEW ir.i.n... J f6 & 6 r 0 > l ii.e S 6 . 11^5/24. Washington, u. The officers of the Barite of imgland, and we believe those who are generally responsible for the British policy in this regard, fully understand that #ienever the time is propitious for considering this question, we stand ready to discuss it with them and, if possible, aid in bringing about this desired result, but until we are able to undertake some comprehensive plan with some assurance of success, and in fact with some obligation on their part to return to gold payment, we believe any attempt by us to volunteer to promote it single-handed and without cooperation and understanding in juondon, will be unavailing and might'do more harm than good. ihis is a subject which has been discussed, as the Board knows, at great length with governor Borman and his associates while h e was in this country a n d during my visits to .London, if the Board believes that this is the principal otiject to be served by the purchase of sterling bills and that this is a favorable time to under take some constructive work along this line, it would be more desirable to take it u p directly with iion&on a nd arrive at understandings which, would have more assur ance of success than could be expected from the purchase of an unimportant amount of sterling bills by the methods proposed. Jay has been asked by cable to dis M r. cuss the natter with (iovernor Borman, a n d will be able to throw further ligjit upon the subject on his return. iky recommendation to our directors has been that the bills already pur chased be permitted to run off at maturity, and that, as a matter of policy, we do not undertake to continue these transactions except under some arrangements with our friends in iiondan, which we are willing to discuss at any time. some further and more formal action will likely be taken by our directors at a later date, which will be transmitted to the Board. ¥ery * V * truly ^yours, v v % * I# f b j. s m s r n Governor. m _ ___________ Reproduced from the Unclassified / Declassified Holdings of the National Archives & 3 Hoveaber 4, 19fc4. 3 3. 3ear Mr, Surlindent Receipt Is acknowledged of your letter of October 31 In whioh you advise that you have purchased from a member bank, exchange secured, sterling bills payable In London, and that pending receipt of the actual Mils, which are now In transit, you have made an advance of 1112,500 to the member bank against per cent Treas ury notes. In our weelely statement to the press Showing the con dition of the Federal reserve banks such bills will be combined with Other bills bought In open market 9 and consequently they may be com bined with other bills on your dally balance sheet tom 34* If you prefer, however, they may he shown separately against the caption now used. Ia your Wednesday nl$*t fora 54 telegram, it will be necessary for you to give the maturity distribution of these bills the same as of any other bills* lr± case the actual maturity ie not loaoim and cannot be definitely ascertained, a orrefal estimate should be made of actual maturities and proper distribution wired to the Board pend ing the arrival of the bills. In the case of if you will furnish us with a purchase is made, giving suoh by a uetailedl schedule giving are actually received. future purchases it will be appreciated memorandum sfthecule on the date the particulars as are available, followed full particulars aa soon as the bills Very truly yours, E« L« Smead, Chief, Division of Bank Operations. Mr. y. J. Zurlinden, Deputy Governor, federal Reserve Bank, Clevelsnd, Ohio. ^ , . ” \'A& ¥ ^ H Reproduced from the Unclassified I Declassified Holdings of the National Archives October 3 1 , 1924. Federal Reserve Board, Washington, D. C. Attention; Mr. Smead. Gentlemen: We are today opening a new account on our general books entitled, "Advances secured by U. S. Government obligations account of Sterling bills in transit". The circumstances are as follows: i We today purchased from a member bank sterling bills, payable in London and which are in transit from London to the member bank. Pending receipt of the actual bills we have made an advance to the member bank of $ 1 1 2 ,5 0 0 , representing 2 5 , 0 0 0 pounds,at $4.50, secured by $120,000 Series B-1 9 2 6 , 4 l/4 per cent Treasury Notes. The bills in question will approximate 25,400 pounds. On receipt of the bills the member bank will endorse them and deliver them to us, at which time we shall release to the member bank the Government obligations deposited with us. When the bills are delivered to us we shall compute the discount on the dollar amount of the bills, based on a rate for sterling agreed upon today, ($4.50), crediting the account of the member bank with the difference between the proceeds as arrived at on receipt of the bills and the amount of the advance made today against the bills. The member bank will guaranty reimbursement to us at maturity at the same rate for sterling. The purchase consists of prime sterling bills with maturities between sixty and ninety days, and the discount is to be computed at 2 l/4 per cent. I trust that this account as set up will meet with your approval but I would be very glad to have your suggestions, as it appears that other transactions of this nature are probable. Very truly yours, j ■■■] j j Reproduced from the Unclassified I Declassified Holdings of the National Archives Dear Governor Platt: Your favor of the 28th is received this morning. Certainly there is no difference whatever, so far as in flationary influence is concerned, in the purchase of domestic bills or foreign bills, in the making of loans to member banks or to foreign banks, or in the purchase of anything by Federal reserve banks which creates a reserve balance for a member* The inflationary effect is identical in any case. I shall hope to have a report in your hands early next week covering this matter, and in the meantime do not hesitate to advise you that I am very strongly opposed to continuing the purchase of foreign bills as I informed Governor Crissinger in Chicago. Very truly yours, Governor. Honorable Edmund P la tt, Deputy Governor, Federal Reeerve Board, Washington, D. C. „ R eproduced from the U nclassified I D ecla ssified H oldings of the N ational A rchives Oct©her 28, 1934 Bear Governor Strong Tour letter of October 27th* with ration to the investment Of Jederal He -erve Bank funds In for eign 'bill*, reached m this morning a&d M Governor Grtasinger was present and also Ur. Miller, sfeo had been confined to his home "by an attack of Influent for several days, we discussed the matter aor^awhat at length* fbs Advisory Council resolution appear* to take the ground that the purchase of foreign M il* does not have the aaas inflationary influence that the purchase of domestic bills has, but the discussion, of the 3oard this noruin^ I to the that is no Cr4*linger us that bills. brou^it most of us think opinion there practicably difference. Oovemor informed you were rather itrongly a^siast the Increase of purchase of foreign Tours r m Mr* BenJ. Strong, Oovernor Jederal fie»erre Bank, lev Tork, 1. t* y truly. Reproduced from the Unclassified I Declassified Holdings of the National Archives Federal R e s e r v e B a n k o f N e w Yo r k October 27, 1924. Federal Reserve Board, lashing ton, D. C. Attention - Honorable Edmund Platt Dear Mr. Platt: On my return to the bank today Mr. Case h a s bended me your letter of Ootobfer E^. asking for a comprehensive report from this bank covering the recent resolution of the Federal Advisory Council recommending the investment of Federal Reserve Bank funds in foreign bills. This report we will very gladly submit to the Board ir> the near future, but, before doing so, we wish to make some particular inquiry as to the volume of business of this character which may be done within the limitations of prudence and with due regard to the various important considerations which would affect the decision. This matter was discussed at some length at the meeting of the Investment Committee in Chicago on Friday lest week, and doubtless Governor Crissinger will advise you of the views which expressed at that time, which you, of course, will understand were without opportunity for conference with my associates in the bank. I hope to have the report to trsnsmit the latter part of this week. Very truly yours, Governor. Reproduced from the Unclassified I Declassified Holdings of the National Archives October 25, 1924 Dear Mr* Case: At the meeting of the Board yesterday, reference was- made to the recent purchases by your bank, amounting to approximately h & 0 0 P 0 0 Q, of sterling bills bearing the indorsement of an American bank and payable to you in dollars* This lead to a discussion of the resolution passed at the recent meeting of the Federal Advisory Council, in which the Council recommended that the Board consider the question whether the time has cone for Federal Reserve banks to exercise their power to in vest some of their funds in foreign bills with approved American banking indorsements and payable by and re payable to Federal Reserve banks in dollars* Following the discussion, one of the members moved "that the Federal Reserve Bank of Hew Tork be directed to make a comprehensive report covering the recent resolution of the Federal Advisory Council recommending the investment of Federal Reserve bank funds in foreign bills". Ihic motion was adopted and an early reply from you v/ould be appreciated* Very truly yours, Mr* J* H* Case, Deputy Governor, Federal Reserve Bank, Hew York, H* T. Reproduced from the Unclassified I Declassified Holdings of the National Archives RESOLUTIONS ADOPTED B Y THE FED ER A L ADVISORY COUNCIL SEPTEM BER 25, 1924. RESOLUTION NO. 1: W h e r e a s , a further easing of money rates at this time might render it extremely difficult to w ard off a period of acute inflation with its subsequent evil consequences with which the country is only too well fam iliar, and W h e r e a s , forced investments of Federal Reserve Banks in our market and con tinued substantial importations of gold into the United States are factors that might tend to enhance the plethora of money already existing, R esolved , that this Council recommend to the Federal Reserve Board to ^con sider the question whether the time has come for Federal Reserve Banks to exercise their power to invest some of their funds in foreign bills with approved American banking indorsements and payable by and repayable to Federal Reserve Banks in dollars.'7 The Council believes that observing these safeguards and by properly scatter ing its purchases the Federal Reserve System can safely invest substantial amounts abroad, without any risk of loss on account of exchange or otherwise, and in doing so ward off to that extent the inflow of gold, incidentally assisting the foreign countries involved in their efforts to stabilize their exchanges and to bring them back to definite gold relations. RESOLUTION NO. 2 : The Council has learned that the Secretary of the Treasury is about to call in for redemption on February 1, 1925, the $118,489,900-4% Loan of 1925, and desires to record its entire approval of the policy involved in this step. * 9 Reproduced from the Unclassified I Declassified Holdings of the National Archives \ £ *«r m * Borg«*u On sxgaining yoar report of lorestoex* oper^tlom fcr» 4 ftr the sozth of Sej*enter, we not* th*t the f%are« are oxoiuiiiTe of the t60f036il8t & of aooeptanoee perohased through the lark of £xglaai on gte^«ifeer ie. in oar f&jUp# ftptr** It U proposed to treat these on parabases in the open market darlig 3<$il«afeer# aid we will jgpnM>* if therefore If yoe advise as of the doll&r aaount of these bills and the rate at whloh the 00 aversion froa $cm x&* to dollar* wad Very traljr yoors* 15.I*.Sm i . L . 3msadf Ohief, Dtrision of Ba£k Operations r tfr. f* K* Burgess* Assistant ?ed«ral Reserve Federal Bss «nre Bank, Hew fork* I* T* Agmt, Reproduced from the Unclassified I Declassified Holdings of the National Archives A Fe d e r a l R e s e r v e B a n k of N e w Yo r k October 18, 1924. Sirs: 3 '3 3 . •/ -/ Attention: Mr. Staead. Replying to your letter of October 16, we beg to advise that the sterling bills purchased through, the Bank: of England have been converted into dollars at the rate of 4.4771. ffiie net cost of these bills in sterling is £50,178:7:3, and in dollars $224,653.54, while the maturity value is £50,633:4:5 and $226,689.99. (/ Under the present arrangement these bills should of course be included under bills purchased. Respectfully, * W. R. BUR5ESS, Assistant Federal Reserve Agent. Federal Reserve Board, Washington, D. C. Reproduced from the Unclassified I Declassified Holdings of the National Archives Office Corresp 'l.uence Gotoher XI* 19&4, Ssbk: 2>'bfZi f —j i’he attached is the first detailed adietiiles.received oovtr ing the ijurchase of aterling bankers* bills from the International Acceptance Bank, inourporatfcd* It oooora to me that you ani the Board i w wish to see then in order to bar* a general idea as to who the acceptors a m endorsers are* X shall be glad to scast over future aoheoiles cover ing suoh purdbasea in oase you would like to see thoa* Reproduced from the Unclassified I Declassified Holdings of the National Archives F o rm N o . 131. g FEDERAL RESERVE Urrice Corresp maence T o __________M ^ y _________ ^ id r. a ta e a l____________ _— Su bject:. ---------- 333 f I advised Hew York over the telephone this morning that the sterllzg bills recently ourchased by the federal £ « b « p t « Bade oT Xm Iork thrtmgi the Bank of atglaxd would inTrc m s g y r f IKfiBBinS^Tnthe weekly statement with other bills bougit in the open market and that a brief statemezt regarding such purchase would appear In the Board’s analysis accompanying the condition statement. Mr. Burgess of the Heir tork Bank advises me that Mr* Case would vary much prefer that no reference to these hills he made in any published statement, and 2 think that this fact shmld he called to the 3otrd*8 attention before our statement is released to the press tomorrow* fhe suggested wording of the statement which it was proposed to incorporate in the analysis Is as followst \ "On Septenfcer 18 the Federal Beserve Batfc of *tw fork used a portion of the small balance which has been kept oa deposit with the Bank of irglani for a *»«*>er of years to purchase prime sterling bills In the London market. The amount of such bills held, #227,000, Is Included in the statement with other bills bought in open / market." RS'pRStrcie'ed fro rh'th e"UncIas'sifiel3;7"Decl ass ified Holdings of the National Archives Septom' I wrote yog on September 19/about our arrangements with, the Bazik of England whereby part of oar balance with that institution would be made productive, and you will recall that £50,000 waa placed in a special interest bearing account and £50,000 was invested in oomereial 'bills. We have now received the fall details from the Bank of England of these transactions and find that the rate of interest paid on the speeial account will be fixed eaoh week:. For the week ending September SO, Interest waa credited at 3-3/8^. With regard to the commercial bills uhioh the Bank of England haa bou^it for os with their guarantee of payment at maturity, I thought you might be interested in the names appearing on these bills; tesmtk Acceptor Baafc of Liverpool & Martins Ltd. Guaranty frost Oo. of Few York and Canadian Batik of Commerce. ditto ditto Standard Bank of South Africa Ltd. H tt ditto tt H it Bunge & Co. Ltd. and Guaranty Westminster Bank Ltd. Trust Co. of Hew YoUc. ditto ditto Hambros Bazik Ltd. Canadian Bank of Ocranerce and Midland Bank Ltd. Guaranty frust Co. of Hew York. ditto ditto Haabros Bank Ltd. w w ditto t« Bunge & Co. Ltd. and Guaranty Trust Oo. of ITew YoaSc Canadian Bank of Comeroe and J. Henry Schroder & Co. Ltd* Guaranty frost Co. of Haw Yoifc Bunge & Oo. Ltd. and Guaranty lb. Brandt Sons & Go. trust Oo. of Hew YoUfc. Midland Bank Ltd. ditto ditto » » Ha&bros Bank Ltd, Laeard Bros. & Oo. Ltd. Mercantile Bank of India Ltd. Barclays Bank Ltd. ditto ditto tt tt ditto Carried forward £ 2,289: 1: 7 1,649:16: 2,658;12: 1,386: 8: 670:16; 0 0 0 6 2,322s 6s $ 3,000: 0; 0 1,151;16: ® 1,048: 7s 0 914s10s 3 2,498: 6s 0 740s %t f 1,202: 2: 6 009»-31«n 3,873: 6: 8 5,000; 0; 0 716:13, * S £31,830^5:11 Reproduced from the Unclassified I Declassified Holdings of the National Archives A L RE SE R VE B A N K O F N E W X 2 Governor Acceptor n !e 3ger. 9/30/24. Indorser Amount Brought forward Barclays Bank Ltd. David Sassoon & Co. Ltd. ditto Barclays Bank ltd. Midland Bank Ltd. Eleinwort Sons & Co. Ltd. Bank of Australasia, Westminster 'Bank Ltd, ditto £ Mercantile Bank, of India Ltd. ditto ditto »» n »» tt International Banking Corpora tion and National City Bank of New York and Sec combe, Marshall & Campion, Mercantile Bank of India Ltd. ditto ditto t» H tl Htl i’otal ........ 31,830 15:11 2,916 13; 4 4,000 0: 0 3,708 0; 0 608 6: 8 1,790 14:10 1,400 0; 3,155; 13; 605 :12: 617 8: 0 2 0 6 £ 50,633; 4: 5 These Mil s mature in from 84 to 92 days and you will note that many of them bear American indorsements. The Dills were purchased at 3-11/16/1 discount and when it is considered that the Bank of Sngland’s guarantee is added to the strength of the names actually appearing on the bills, there can be no doubt as to the excellence of the investment. IQie details of our initial purchase of sterling bills through the Bank of Sngland are received at a most oprjortune time in view of the recent recommendation of^ the Federal Advisory Council that the Federal Reserve Board consider the question whether the time has come for Federal reserve banks to exercise their power to invest some of their funds in foreign bills with approved American banking indorsements and payable by and repayable to Federal reserve banks in dollars. As explained in Kr. Kenael's letter of September 24,* this bank has -ourchased from **■ ~ • the International Acceptance Batik a parcel of sterling bills, the method employed in that transaction being the one suggested by the Federal Advisory Council. In view of these circumstances, it is interesting to compare our purchase of sterling bills through the Bank; of England with the transaction with the International Acceptance Bank. You will recall that in the latter case we had an American Reproduced from the Unclassified I Declassified Holdings of the National Archives 3 FED ER A L R ESERVE B A N K O F NEW Governor Oris? " '*?: 9/30/24. \ ^ K j IV indorsement, the whole transaction was on a dollar basis with no risk of exchange, and tho bills were bought by us at 2-l/4)1. Of course, we have not undertaken to cover the exchange risk on the £50,000 of bills bought through the Bank of England as that represents part of a complimentary balance which we have carried with the Bank of England for years. However, should further purchases of sterling bills through, the Bank of England be made, we would presumably eliminate the risk of ex change as was done in the transaction with the International Acceptance Bank, (That would be acc jutplished by selling future sterling against each purchase of spot that is made. For example, future sterling, deliverable 90 days hence, can be sold at about 1-l/S cents per pound discount under the quotation for soot sterling, and reducing that to a per annum basis, gives us about exchange* 1% discount to cover the risk in Consequently sterling bills bought through the Bank of England at 3-ll/l6$ discount would net us 2-11/16,0 if the exchange risk were eliminated. To compare that return with the discount received on the bills bought from the International Acceptance Bank, it should be stated that rates in London declined slightly, say 1/16 or l/8/o, between the date of the Bank of England purchase (September 17) and the purchase on September 24 from the International Acceptance Bank, and taking that reduction into acc cunt, the purchase through the Bank of England would have netted us 2-9/l6^ or 2-5/8$ as against 2-1/4,0 on the bills taken from the International Acceptance Bank. Most of the difference is accounted for by the fact that the International Acceptance Bank get l/4$ for its indorsement ■vtfiile the Bank of England, under the terms of our agreement with them, guarantees bills bought for our acoount without charge. We have been giving considerable thought to these transactions here at the bank and they have been discussed with our Executive Committee which approves in principle of such transactions as were undertaken with the International Accept ance Ban*c so far as they assist imerican banking institutions to develop a market Reproduced from the Unclassified I Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF NEW Governor Crif 9/30/24. ‘t for sterling bills here and afford a means of rediscount in Hew York for prime sterling bills with good American banking indorsement; in other words, for this bank to render the same support to imerican banks and bankers in their purchase of prime sterling bills as we have done in helping them develop a dollar discount market. However, if the Federal reserve banks embaxk upon a program of investing a substantial amount of their assets in sterling bills or bills drawn in other foreign currencies with a view to preventing further ease in money here and to ward off additional gold imports as suggested by the Federal Advisory Counoil, we believe that such operations should be conducted directly through our own foreign correspondents. That is the method which the Federal Reserve Act clearly provides for making such investments since the Act authorizes Federal reserve banks to appoint foreign correspondents and establish agencies in foreign countries "wheresoever it may be deemed best for the purpose of ourchasin«. selling and collecting bills of exchange, and to buy and sell, with or without its indorsement, through such correspondents or agencies, bills of exchange (or acceptances), etc. etc.” Fur the m o re, one of the cornerstones in all of our agreements with foreign central batiks has been the reciprocal purchase of bills. We, in conjunction with the Bank of iingland, have fostered the idea of close cooperation between central banks of issue and have felt that all important operations of central banks in foreign countries should be undertaken through the respective central banks of those countries. Keeping that in mind, we believe that you and your associates will agree with us that our purchases of sterling bills from American banks should properly be undertaken to assist in the development of a market as outlined above but that when the question arises of employing part of our re sources in foreign bills, the Federal reserve banks should follow the usual course adopted by European central banks and in fact private commercial banks as well, of in vesting directly through our own correspondents with their guarantee and agreement to discount. Honorable D.R.Crissinger, Governor, Federal Beserve Board Washington, p. c. Deputy Governor. or indorsement Reproduced from the Unclassified I Declassified Holdings of the National Archives F orm N o . 181. Office Corresp *Jence To From From. ___ Mr. Hoell FEDERAL RESERVE BOARD Date September 50, 1924 Subject: Mr. Snead Last night we received a purchase schedule from the Federal Reserve Bank of New York covering the purchase on September 25 of £100,000 prime sterling bankers bills. The schedule reads as follows: wi» 100,000. Prime sterling bankers bills, endorsed Rothschild & Go., London, and International acceptances bank, Hew York, delivery to be made on arrival in about ten or twelve days. "These bills were purchased at the discount rate of 2-l/4 per cent, exchange secured. "Figuring exchange on the above bills at 4.46 they amount to the equivalent in dollars of #446,000. "We made part payment today of #430,000, to International Accept ance Bank, Hew York - on account, against the deposit of a like amount of U. 8. Treasury notes 4-3/4 percent series A - 1925 due March 15, 1925. "Balance of payment will be adjusted upon arrival of the bills at which time a schedule giving complete details will be forwarded to the Pederal Reserve Board.*1 So far as I know this is the first purchase of foreign bills payable in*xoreign currency which has been made by a Federal reserve bank. I assume, therefore, that the Board members would be interested to know the details noted above regarding this purchase. Executive F o l d e r Reproduced from the Unclassified I Declassified Holdings of the National Archives Dear l'r» Eenzelt Receipt is aoteaowladged of your lett r of Septeirhar 24thf addressed to dorentor (friasingQr,'donfirming’your telephone ©oavers&tion with hirr that 'late and advising of the details of your ptsrohase f r m the Internat ional Aooe timoe Bsn'c as of September 25th of & X00f000 prime sterling hsnlsers* bills, indorsed "by Rothschild & Company, london* and the International Aooeptanoe Bants* Yr.-ur letter has % bvoxigiht to the attention of the iwf>er« of the Board* m T«ry truly yours, (Signed) W aiter L. Eddy ‘ftalter L« Jddy, Soeret&xy* IT. 15* R* Kenzel, Deputy Governor, fadaral Reserve Bank, f Hew T o u t, TT« T* Reproduced from the Unclassified I Declassified Holdings of the National Archives F o rm N o . 131. *■'. "Office Correspondence To Qotoyaor Tottag______________________ From Mr. S*sa&___________________ ____ v/ -„f F E D E R A L R ESER VE BO AR D 1 Date Saptibsr 2k, Snhjeri: y p f U a bills bomfrt for tbs aocomt of 4h# fodaral issarvs lank of !• « Yoik doriaf 2— 84&S 0 Po 1 m i baadisf joti harswith * •tatsawnt shoviac tbs aaouat o f fo&sifa b ills bou£it for tbs lodaxml Bssarvs Bank of ftv ToxSe by *oaths f m January to August, 1929* iaolusiTa. fbis statsaeat also dhovs tha into * i whioh ths b i l l s aora purohasad and tba axobaafs mta. Ob Ssptaabar 19 tba Sjrstsa bold about $lb,0U0t000 of Storllsf b i l l s , • $650,000 of **»ndh b ills * and 1770,000 ' of Htnfaslaa b i l l s , or a total of $17,^60,000.^ BEC»D in FILES SECTIOI :-fA/ MAY 25 T943 A5./I Reproduced from the Unclassified I Declassified Holdings of the National Archives fomim bills m m t * jl fm ajccoui? of H8f TOHK IXJSIHO 1929 m t mmm> Hi. ' .. .. T n W T 5 T 9 l 3 ' ' ~ r J Boutfct >y Basic offittlawl Bata (3t«rXin*) £KM..£S.„a Aaount Dlseouat rat® (p«r cwnO Sxdba&fa . *»!*.._ $4.8493 January Feb Fabruary 62 - 80 $139,266.84 4-3/16 to 4- 9/38 70 - 83 90.611.53 4- 1/4 to 5- 7/32 4.8493 Marcto 81 - 84 105.632.71 5- 3/16 to 5- 9/32 4.8493 April 6s - 91 120,109.77 5-3/32 to 5- 1/4 4.8493 May 72-90 lH8 .963.28 5 (Tana 80-86 71,751-^l July 69 - 76 August 28 - 93 to 5- 9/32 4.8493 5- 7/32 to 5- 1/4 4.8493 112,782.07 5- 1/4 to 5- 13/32 4.8493 10,889.187.93 4- 3/4 to 5- 13/32 4.8482 - 4.849; (h u e ) January to - 78 *3* .156.31 February 28 - 77 I97. n 6.23 3- 1/4 R March 32-80 483.788.81 3- 1/4 II April 32 - 82 272.642.15 3- 1/4 to 3- 5/16 II May 28 - 82 433.948.90 3- 1/4 to 3- 3/8 ft Ju&s uu - sg 309.233.73 3- 3/8 to 3- 1/2 « July 58 - 83 304,096.20 3-3/8 to 3- 1/2 II August 66- 84 296.399.43 3- 3/8 to 3- 1/2 « B9Mh| Jbj Of In w «* 3- 1/8 to 3- 9/32 tnm _&EJtomr IWMttl leak of SuSaoeit .03906 (Panfo) July 22-84 1.012,287.42 7- 1/2 to 8 .im August 92-80 207,393-13 7- 1/2 to 8 * m x m . BESfBTx s u m DIVISIOI Of BAKK 0P2RATI0B3 SSPTIMBZK 24. 1929. Reproduced from the Unclassified/ Declassified Holdings of the National Archives / ■''toJ \J RECEIVED 7 j 1924 Federal R eserve Bank o f OFFICE O F T H E GOVJti^ijNQii N e w Yo r k 3 3 3 , i - ) Sept. 24, 1924. Dear Governor Crissinger: Referring to our conversation over the telephone today I thought that you y would be interested in the details of the transaction we have had with the Interna tional Acceptance Bank in respect of sterling bills. Following is a description of the way it worked out: We have today bought from the International Acceptance Bank as of tomorrow, September 25, £100,000 prime sterling bankers1 bills, indorsed Rothschild & Company, London, and International Acceptance Bank, delivery to be made on arrival in about ten or twelve days. We, however, will make payment tomorrow against the deposit with us of an equivalent sum of United States Government securities which we will re deliver to the International Acceptance Bank upon delivery of the sterling on arrival, Twelve days prior to the various maturities of the sterling purchased, we will deliver same to the International Acceptance Bank for collection against their deposit with us of an equivalent amount of United States Government securities which will be released to them as we receive payment through them at maturity for the rela tive sterling bills. The discount rate is exchange secured, that is, the whole transaction is on a dollar basis, and as the exact discount cannot be figured until the maturi ties of the bills are known on arrival, I have arranged to make payment tomorrow of a round amount, say $430,000, on account. Figuring exchange at 4.46, the balance of the purchase price remaining to be adjusted upon receipt of the sterling will be about $13,500. AT B O A R D M E L TING SEP 2 6 1924 Reproduced from the Unclassified I Declassified Holdings of the National Archives FEDERAL RESERVE BANK OF NEW V 9/24/S4. It will be seen that by this procedure the Federal reserve bank is protected at every point by possession of eligible assets against the outlay of its funds; also that we get a strong American banking indorsement on top of very strong London names and that there is no exchange hazard to us involved and the rate is slightly better than we could obtain on American bills in this market at the present time. Further, as distinguished from we ourselves going into the London maricet and buying bills there, we are in effect putting ourselves back of an American banking institution which invests its own funds in the London bill market and it would seem that transactions of this character with American banks might properly be regarded as in a measure extending the support which we have given to American banks in the development of a dollar discount market to their operations in the London market, making it possible for them to use their funds in the London market, relieved of the hazards of the London discount rate and the emergencies of the London discount market in the event that they found it desirable or necessary to relieve themselves of their sterling portfolios through discount or sale. Very truly yours, E. R, K e j y z e l f Deputy Governor* Hon. D. R. Crissinger, Governor, Federal Reserve Board, Washington, D, C. ERK/VR Reproduced from the Unclassified I Declassified Holdings of the National Archives Dear !!?* Casts She Federal l^osenra Board liaa raoeived year letter of Bapterrfber 19th s M notas that wvwmmmt* have heea made with the Bank of Baglaiwl liiereCy part ©f your bank*a telaac* with that inatitntiOB will be la» voatod. It la further aotea that tha qmeatloa of participation In theae iuvestweata by other Federal w a r n Panics will ba tafcan tap at tha forthcoming aenrernora* Gtrn'erenea* fery truly yoara, (Signed) Waaiter •Juki* Eddy Walter !»• lddy9 Secretary* l r* *T» H* Gate, Deputy (Joremor, Fad oral Reserve Baa&e, *nr Yar^t !• T. • v* Reproduced from the Unclassified I Declassified Holdings of the National Archives Dear Governor Crissinger: During one of Governor Strong’s visits to London4, he had a dis cussion with the Governor of the Bank of England in regard to the present arrangement of our accounts and it resulted in the following proposal: Of our present balance of some £165,000, approximately £100,000 to be made productive. As an experiment it was proposed that one-half of that sum be invested in commercial bills of the usual character "which we are permitted to buy abroad, and the other £50,000 to be employed for short periods at interest under guarantee of the Bank of England, the procedure in the latter case to be to transfer the sum of £50,000 to a special account upon which interest will be earned at a little below the weekly Treasury bill "tap" rate. I understand that Governor Strong made a statement to the Federal Reserve Board in the early part of June with regard to this proposed change CJ 55 £ it) s E 2? ft PC < O CQ Ex <1 02 in the handling of our account with the Bank of England, and I am merely writing you at this time to make it a matter of record for, we have just received a cablegram from the Bank of England informing us that to-day we 03 Q_ LU GO are to receive $250,000 for credit to its account on our books. ®ie Bank of England also informs us that they have employed £ 5 0,000 of our balance at interest and that it has bought for our account £50,492:9:7 commercial bills at a net cost to us of £50,038:18:6. The question of participation of this account will be taken up at the Governors» Conference in. llovembey, Very truly Honorable D.R.Crissinger, Governor, Federal Reserve Board, Washington, D. 0. £1 J. H. QASB Deputy Governor Reproduced from the Unclassified / Declassified Holdings of the National Archives I RESOLUTIONS ADOPTED B Y THE FED ER A L ADVISORY COUNCIL SEPTEM BER 25, 1924. RESOLUTION NO. 1: W h e r e a s , a further easing of money rates at this time might render it extremely difficult to w ard off a period of acute inflation with its subsequent evil consequences with which the country is only too well fam iliar, and W h e r e a s , forced investments of Federal Reserve Banks in our market and con tinued substantial importations of gold into the United States are factors that might tend to enhance the plethora of money already existing, R eso lved , that this Council recommend to the Federal Reserve Board to con sider the question whether the time has come for Federal Reserve Banks to exercise their power to invest some of their funds in foreign bills with approved American lianMng'mcTorslTmffi^^ and repayable to Federal Reserve Banks in dollars. The Council believes that observing these safeguards and by properly scatter ing its purchases the Federal Reserve System can safely invest substantial amounts abroad, without any risk of loss on account of exchange or otherwise, and in doing so ward off to that extent the inflow of gold, incidentally assisting the foreign countries involved in their efforts to stabilize their exchanges and to bring them back to definite gold relations. RESOLUTION NO. 2 : The Council has learned that the Secretary of the Treasury is about to call in for redemption on February 1, 1925, the $118,489,900-4% Loan of 1925, and desires to record its entire approval of the policy involved in this step. 9 Reproduced from the Unclassified I Declassified Holdings of the National Archives I I I ■■, eat lament Referring to year copmwiiQafc.ioii o t Uagr §3rd#. . you ar# advised the Board has not issued a statament covering the subject of "Acceptances offered by the German £»old jllas a m t bank m being made‘eXIgrble for reserve bank discount7,r For yoar information, hew?ever, a ruling has been made on this subject by the Board*a ^©ansel whicli will appear in the June issue of the Federal Reserve Bulletin, to be released for publication on or about the twelfth of the current month* Youra very truly. ^craed) J, 0. H oel J. C. Hoell, Assistant Secretary* Reference Library,. Federal .Reserve Bank, Federal Reserve ?. ()• Station, Hew York, N* Y* Reproduced from the Unclassified I Declassified Holdings of the National Archives ^ R t ^ R E N C E I/ -'A R Y R^L RESERVE BAti Q ^NE ORK RESERVE P7 O. STATION N E W YORK, N. Y. 5/23/24 tstribution will you kindly furnish us with the Six |5) of : Statement-acceptances offered "by G-eman Gold Rediscount Bank eligible for Reserve Bank discount. Quoted in Journal of Ooffimeroe of 5/9^4, p* 1, Your courtesy in this matter will be greatly appreciated. reference l ib r a r y . Reproduced from the Unclassified I Declassified Holdings of the National Archives A V l/ u . Federal R e se rv e Bank o f i \ S / - y I . - H * \ "-,v\ Mf/ ■ New York Sr ‘O'-/ / \ ?V v - IN R E P L Y P L E A S E R E F E R May 27, 1924. to S i r s : I received your letter of May 23 asking me to write the Board with regard to certain points in connection with the credit which the International Acceptance Bank has arranged here with a number of banks and bankers, for the German Gold Rediscount Bank, and yesterday discussed the subject with Mr, * f » W W * 8 8 W 8 S a 6 6 « i» $ iS a it Miller over the telej^Q»j&. Should the Board decide to discuss this subject ia the next ’’Review of the month” I think the circumstances that led to the opening of the credit here will be found set forth in ray letter to the Board dated April fjk I feel quite certain that Mr. Warburg*s purpose in arranging this credit and our own views in being willing to purchase these bills, with satisfactory American banking endorsement, arose from a desire to be helpful in connection with Ger many* s efforts to get back to a stable currency basis, and a desire to make certain that in acquiring credits for use in this connection Germany would not have to rely solely on sterling credits. Two principal advantages to be gained by the Onited States from the establishment of this credit were set forth iii my letter of April J C as follows: (a) Banking facilities extended between two countries are likely to lead to increased trade between them. (b) The credit will assist in maintaining the dollar as one of the bases of trade and settlements in Germany, where as without this credit the pound sterling is likely to become the predominant medium. Reproduced from the Unclassified / Declassified Holdings of the National Archives ... aL ^ ^ > e ra l re s e rv e bank o f new YORK . Federal Re genre B< J May £7, 1924* / As to th© "teste of desirability” which the reserve banks are ex pected to apply to the bills when offered to them for purchase, as far as we know none of the bills under this credit have yet been sent here for discount with the American members of the syndicate, but it is my understanding that it is very definitely agreed between the Gold Rediskont Bank, Berlin, and the syndicate manager for the groups of American banks and bankers who will partici pate in the proposed credit that no bills will be offered for rediscount to the syndicate that have not been drawn in a strictly commercial transaction, and that the American syndicate reserves the right to return any bills in connec tion with which there is any question in this regard. This point has been so stressed that it seems very improbable that any ineligible,bills would even through misadvertence be seiifc to the American syndicate for redisoount. With regard to the last paragraph in your letter, in which you say that both Mr. Sarburg and I stated, that, "such of these German trade bills as are offered in this market will be related directly to some German import transaction requiring liquidation in dollar exchange." It is not my recollec tion that either Mr. larburg or I made this statement, and I do not think that it is true. My recollection of the conversation was that Mr. Miller, in dis cussing the subject broadly, asked whether it was not true that this credit would eventually have to be liquidated by the shipment to this country probably of goods or possibly gold or securities, to which ^r. Warburg and I replied in the affirmative. As Mr. Warburg is absent in the South I am unable to confirm my recollection with him. But it is stated in my letter of April 7 that "only such firms are to be privileged to rediscount with the Gold Rediskont Bank as receive foreign exchange remittances in the regular course of their business. This means that the customers of the Gold Rediscount Bank whose bills may be Reproduced from the Unclassified I Declassified Holdings of the National Archives ■' OERAL RESERVE BANK OF NEW YORl Federal Reserve Bo #3 May 27, 1924. sent to this country as a basis for credit are firms who are likely to have their invoices paid in foreign currencies which they could convert into dollars in order to pay their obligations here. In other words, these bills may be self-liquidating, but the liquidation will not necessarily be in dol lars. It is likely, however, to be in some foreign currency which could be converted into dollars in order to pay the dollar obligation incurred by the rediscount of these bills in this country. It is the opinion of the officers of this bank that under present conditions of easing credit, very few if any of these bills are likely to find their m y into the Federal reserve bank as the members of the syndicate will themselves deiire to hold them until maturity. We understand that the liabil ity of the present syndicate ends July 29, 1924. If this letter does not provide the information the Board desires, or if the Board desires further information, I sh^tlid be obliged if Mr. Miller or Mr. Sddy would call me on the telephone sa that I may endeavor to furbish what / ' the Board desires. / / / Reproduced from the Unclassified I Declassified Holdings of the National Archives Fe d e r a l R e s e r v e Ba n k of N e w Yo rk IN R E P L Y P L E A S E R E F E R May 24, 1924. to Dear Mr, Eddy: I have your letter of May 23 with enclosure regarding the German trade bills. I will reply to this on Monday when Mr. O fHara returns to the office, and if it will be too late for you to receive my reply in the mail Tuesday morning, please let me know, and I will telephone it to you on Monday. Very truly yours, Pierre Jay Chairman W. L.Eddy, Esq., Secretary, Federal Reserve Board, lashington, D. G. federal Reserve Board Reprotfucsd from theUnelasslffed/ Declassified Holdings of the National Archives 333 Way 25, 1924 Dear Mr. Jay: o '•JHNN^ring to the ruling made lay the Board at the request of 3$S?iatnd Hr. Warburg, concerning the eligibility for purchase by Federal reserve banks of Semen trade bills paya ble in dollars and in the United States, endorsed by the German Gold Rediscount Bank, and also by some Amerioan banking institu tion, I would state that the Board proposes to publish the rul ing in its forthcoming issue of the Bulletin, in form as per the enclosure herewith* There is set forth in the. enclosed maaaorandum only the legal ruling and no reference is made therein to the general oircumstances leading up to it, nor is any reference made to the tests of desirability which the Federal reserve banks are ex pected to apply to the bills when offered to them for ourohase* In the next review of the month, the Board will, in comn>enting upon the recent recomnendations of the Federal Advisory Council, refer to the subject of German trade bills and it would like to have from you a statement as to the basia upon which the expedi ency of this ruling- depends and your views of the "tests of Desirability" which the reserve banks should apply to such bills. I am certain that the Board in its discussion of the subject in the review of the month will want to cover the point made by both you and Mr. Warburg that such of these German trade bills as are offered in this market will be related directly to some German import transaction requiring liquidation in dollar exchange. It would be appreciated if you would elaborate upon this point. Very truly yours. •Walter L. Eddy, Secretary Mr. Pierre Jay, Chairman, Federal Reserve Bank, New York, N. Y. (%closure) Reproduced from the Unclassified I Declassified Holdings of the National Archives F o rm N o . 131. Office Correspo Jence T o ______ fng, Federal Reserve Board._____ From_____M£. Wyat t- General Couns el» F E D E R A L R ESER VE BOARD J- . / L>ate.__Mb^ 1S, 1934. Subject: Ruling for the Builatin re Eligibility of German T r a d e B i l l s f o r purchase b y Federal Reserve Batiks# In accordance with the attached request, there is respectfully submitted herewith a draft of a formal ruling for publication in the Federal Reserve Bulletin with reference to the eligibility of German trade hills for purchase by Federal reserve banks. This is intended to cover the subject ruled on informally in Governor Crissinger1* letter of April 8 to Mr. Jay* Respect frilly Ruling attached^ / *i‘ Reproduced from the Unclassified I Declassified Holdings of the National Archives Form N o . 131. Office Correspondence T o _____ FEDERAL RESERVE BOARD Law Committee (Messrs. Hamlin & PI Date April 29.1924. Object: From________ Eju Sddy Jiddy 4 ^ fy / w By direction of the Governor there is referred to the Law Committee the" attached file of correspondence, with regard to the recent inquiry of the Federal Heserve Bank of Hew York whether the Board would object to P"111*011513® "by tkat of German trade bills, payable in dollars in -fche United States and endorsed by the new German Gold Rediscount Bank and by banks and bankers in the United States* while the Board, on the advice of Counsel, has advised the Hew York bank that it will not object to the purchase of such bills it is desired to have a formal ruling on the question of their eligibility which could be p u w K ^ p S b jya the Federal Reserve Bulletin* Reproduced from the Unclassified I Declassified Holdings of the National Archives ^ RULING FOB THE BULLETIN % *\ W .../ V / ELIGIBILITY OF GERMAN TRADE BILLS FOE PURCHASE BY FEDERAL RESERVE BANKS Tho Federal Reservs Board has recently boon callod upon to rule on tho •Xigibility for purchase by Federal reserve banks of German trade bills, payable in dollars and in the United States, endorsed by the German Gold Bediscount Bank, end also by some American banking institution. Time bills would arise out of a credit which certain American banks and bankers propose to arrange in favor of the German Gold Bediscount Bank, It is provided in Section 14 of the Federal Reserve Act that Federal reserve banks may purchase bills of exchange of the kinds and maturities made eligible for rediscount under the terms of the Federal Reserve Act* The Regulations of the Board prescribe that a bill of exchange or trade acceptance eligible for rediscount shall be payable in the United States in dollars, but there is no requirement that the bill shall be drawn in the United States* A bill of exchange or trade acceptance drawn in a foreign country is technically eligible for discount or purchase at a Federal reserve bank upon the same terms and conditions as a bill of exchange or trade acceptance which is drawn in the United States# Accordingly if the German trade bills, which are to be drawn under the proposed credit to the German Gold Rediscount Bazik as above described, are negotiable in form, arise out » of commercial transactions, and have maturities not exceeding the maturities prescribed by•the Federal Reserve Act for paper eligible for rediscount, there is no legal objection to their purchase by Federal reserve banks. The Federal Beserve Board has;therefore^ ruled that German trade bills of the kind described above may be purchased by Federal reserve banks if they are negotiable bills of exchange arising out of commercial transactions# then the bills are offered to the Federal reserve banks for purchase they must, Reproduced from the Unclassified I Declassified Holdings of the National Archives tm 2 m / of cour8«, comply with tha applicable provisions of the Federal Reserve Board** Regulation B« In making this ruling the Board has assumed that provision will be made for the payment of these trade bil}s in the United States at maturity* Reproduced from the Unclassified I Declassified Holdings of the National Archives / ’ *!• / ".S April 3# 1924# Dear Mr* Jays ^©plying to your letter of April 5th# in ushioh you inquire whether t f i t r e o n the part of tho Federal Reserve Board to the Federal reserve banks p^wgbBJSUdQg German trad® bills payable in dollars in the United States and endorsed by the ne» Oeraan Gold Rediscount Sank and by banks and bankers in the United States $ which bill* would grow out of the operation of the American syndicate arrangement described in your letter and also verbally deaorlbed more in detail by you and Mr, liarburg at the meeting of the Board yesterday* 1 woul& state that the Board* on the adviee of its Counsel, and on the assumption that the bills in question will be ne** r,otiabl© commercial trade bill*# believes that they will be eligible for purchase by Federal reserve banks# the Board a u u M i also that provision will be arnde for their payment in the United States at maturityt and, therefore, no objection will b© raised by the Board to their being purchased by Federal reserve banks* if offered at such times as the banks sre in the aarkot for bills# Very traly yours# (&igned) D. R. CrWingfer Governor Mr. Pierre Jayt Chairaan, Federal Beserve Bank* Hew York, II. Y* Reproduced from the Unclassified I Declassified Holdings of the National Archives THE S E C R E T A R Y O F THE T R E A S U R Y W ASHING TO N My dear Governort With reference to your letter of April 6th in con nection with the purchase of commercial trade bills ear dorsad by the new German Rediscount Bani by the federal £eserve Bank of lew York, 1 see no ob>ction to the pro posed letter to Mr. Jay, Chairnan of the Federal Beserve Bank of Hew York. Very truly youra, Secretary of the treasuxy. Honorable 33. £• Crissinger, Governor, Federal Beserve Board* Reproduced from the Unclassified I Declassified Holdings of the National Archives 3 3 April 8# 1924. Bear l!r* Secretary* I m enclosing herewith, for your Information, copy of a latter addressed to the Board hy the Chairman of the federal Reserve Bank of lew York with regard to the eligibility for jrarohaae hy that of desman tradehills of the Mud therein described* I an also sending y<ra draft of a reply nhioh the Board proposes to mice to this letter* fhe propped reply, however* will not he forwarded teat11 the Board is advised of your approval and until you have had an opportunity, if you desire, of discussing the rratter with the Seoretary of State. Bespectfetlly yours, D* lUOrlsainger, Governor* Hon« A* ¥* lellon, Secretary of the Treasurzf, Washington* D* 0* 3 , ^ - 1 Reproduced from the Unclassified I Declassified Holdings of the National Archives f W ASHINGTON ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD April 8, 1024. Dear Mr* Jay* j Replying to y o u r l a t t e r of ApgllStkr l n which you inquire whether there wil3* he any objection on the part of the Federal Reserve Board to the Federal reserve banks pur chasing German trade bill# payable in dollars in the United States a n d endorsed by the new German Gold Rediscount Bank and by banks and bankers fin the United States, which bills would grow out of the operation of the American syndicate arrangement described in /your letter a n d also verbally de scribed more in detail b$ you and Mr* Warburg at the meet ing of the Board yesterday, I JKould state that the Board, on the advice of its Counsel, and o n a s s u m p t i o n that the bills in question will be negotiable co ittZ M sro ia l trade bills, believes that they will be eligible for purchase by Federal reserve banks* The Board assumes that provision will be made Btttifefor their payment in the United States at maturity, and, therefore, no objeotion will be raised by the Board to their being purchased by Federal reserve banks, if offered at such 'times as the banks are in the market for bills* Very truly yours, D. R* Crissinger Governor * Mr* Pierre Jay, Chairman Federal Reserve Bank, New York, H.Y* APR - 19: Reproduced from the Unclassified / Declassified Holdings of the National Archives 333, 9^ Washington, D.* C., A p ril r , 1924. Federal Reserve Board, Washington, D. C* S irs: Mr. P. M. Warburg, Chairman o f the International Acceptance Bank, has in mind the arrangement of a credit of $5 , 000,000 with a group of American banks and bankers in favor of the new German Gold Rediscount Bank, such credit to be availed of in the form o f German tra d e b ills , pay able in dollars in the United States, such b i l l s to be endorsed by the Gold Rediscount Bank. He has asked us whether i f such b i l l s were o f fered to us fo r purchase or rediscount with a satisfactory American bank ing endorsement we would consider them e lig ib le and would be w illin g to take th«m, along with other b i l l s , when we were in the market. We have to ld him that we consider them technically e lig ib le and would be w illin g to take them at such times as we migtit be buying b i l l s , but that we thought the Federal Reserve Board should be apprised of the matter as i t presents a question of policy. Mr. Warburg has given us the follow ing information regarding the new Gold Rediscount Bank, which has been organized as a temporary in s ti tution to be developed in to, or absorbed the large gold bank o f Ger many, contemplated under the plans o f the so-called Dawes Committee* The Gold Rediscount Bank is being started now with a capital of h 10,000,000.-, 25% paid-in, balance payable in instalments before the end of the year. Of this a German syndicate, comprising the large German banks, banking firms and corporations, has taken ■£ 5,000,000,* (less one share), while the second h a lf (plus one share) has been taken by the Reproduced from the Unclassified I Declassified Holdings of the National Archives -2 ~ Reichsbank, which in turn receives fo r this purpose a L 5,000,000 credit fo r several years from the Bank of England, acting in conjunction with other European note-issuing banks. The management of the new Gold Rediscount Bank is in the hands of the Reichsbank. I t has received the p r iv ile g e of issuing notes to the ex tent of •£ 5,000,000.-, ftot less than h alf of which must be secured by foreign exchange or gold. I t w i ll buy German b ills only i f made payable in pounds sterlin g or dollars. Only such firms are to be p rivileged to rediscount with the Gold Re discount Bank as receive foreign exchange remittances in the regular course of th eir business. This means that the agricultural and small industries and trades are exoluded. The b ills to be discounted must have at least three signatures, of which one must be that of a bank or banker. We understand that B ritish merchant bankers are arranging a discount credit of £ 10,000,000.- in London on German trade b i l l s , sim ilar to those proposed under the $5,000,000 American cred it, except that the b ills w ill be payable in England in s te rlin g , while under the American credit the b ills w i ll be payable in the United States in d ollars. We have f e l t that there were two principal advantages to the United States to be gained from the establishment of this credit here. (a) Banking fa c ilit ie s extended between two countries are lik e ly to lead to increased trade between them. (b) The credit w ill assist* in maintaining the dollar as one of the bases of trade and settlements in Germany, where as without this cred it the pound sterlin g is lik e ly to become the predominant medium. We are accordingly submitting the plan and our views regarding i t to the Board fo r its information and consideration, and would propose i f the Reproduced from the Unclassified / Declassified Holdings of the National Archives -3 - credit is arranged to purchase such "b ills, w ith satisfactory American bank ing endorsement, from time to time as i t may suit our convenience, unless the Board sees some objection to such a course. Yours respectfully,
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